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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 1994
Commission File No. 1-8157
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PANHANDLE EASTERN CORPORATION
(Exact name of registrant as specified in its charter)
A Delaware Corporation
(State of Incorporation or Organization)
74-2150460
(IRS Employer Identification No.)
5400 Westheimer Court, P.O. Box 1642, Houston, Texas 77251-1642
(Address of principal executive offices, including zip code)
(713) 627-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at July 31, 1994
-------------------------- ----------------------------
Common Stock, $1 par value 120,703,223
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Periods Ended June 30
Three Months Six Months
---------------- -----------------
Millions, except per share amounts 1994 1993 1994 1993
- - ---------------------------------- ------ ------ ------ --------
<S> <C> <C> <C> <C>
Operating Revenues
Transportation of natural gas $309.6 $224.3 $643.3 $ 458.5
Sales of natural gas and liquids 103.5 294.8 219.3 615.9
Natural gas storage and other 51.6 54.7 119.4 112.0
------ ------- ------ --------
Total (Note 3) 464.7 573.8 982.0 1,186.4
------ ------- ------ --------
Costs and Expenses
Gas purchased 86.7 183.1 190.9 330.3
Operating and maintenance 120.3 147.4 241.2 288.0
General and administrative 53.4 52.3 115.4 112.9
Depreciation and amortization 57.4 55.8 115.5 112.5
Miscellaneous taxes 17.1 21.0 39.2 41.5
------ ------ ------ --------
Total 334.9 459.6 702.2 885.2
------ ------ ------ --------
Operating Income 129.8 114.2 279.8 301.2
------ ------ ------ --------
Other Income and Deductions
Equity in earnings of
unconsolidated affiliates 10.5 4.8 12.4 9.1
Other income, net of deductions 0.7 5.6 1.9 9.1
------ ------ ------ --------
Total 11.2 10.4 14.3 18.2
------ ------ ------ --------
Gross Income 141.0 124.6 294.1 319.4
Interest Expense 56.4 69.5 110.7 147.1
------ ------ ------ --------
Income before Income Tax 84.6 55.1 183.4 172.3
Income Tax (Note 4) 35.7 20.7 75.7 68.4
------ ------ ------ --------
NET INCOME $ 48.9 $ 34.4 $107.7 $ 103.9
====== ====== ====== ========
Average Common Shares Outstanding 120.4 112.2 120.3 110.4
====== ====== ====== ========
Earnings per Common Share $ 0.41 $ 0.31 $ 0.90 $ 0.94
====== ====== ====== ========
Dividends per Common Share $ 0.21 $ 0.20 $ 0.42 $ 0.40
====== ====== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements
2<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
Millions 1994 1993
- - -------- --------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 14.1 $ 18.4
Accounts and notes receivable (Note 3) 240.7 294.2
Materials and supplies 109.7 114.0
Other (Notes 3, 5 and 8) 310.3 328.5
--------- ---------
Total 674.8 755.1
--------- ---------
Investments
Affiliates 141.4 129.2
Other 88.3 90.2
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Total 229.7 219.4
--------- ---------
Plant, Property and Equipment
Original cost 7,239.0 7,076.2
Accumulated depreciation and amortization (2,819.3) (2,732.9)
--------- ---------
Net plant, property and equipment 4,419.7 4,343.3
--------- ---------
Deferred Charges
Goodwill, net 513.2 520.5
Prepaid pension 231.3 222.8
Other (Notes 3 and 8) 851.2 866.2
--------- ---------
Total 1,595.7 1,609.5
--------- ---------
TOTAL ASSETS $ 6,919.9 $ 6,927.3
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
Millions 1994 1993
- - -------- --------- ------------
<S> <C> <C>
Current Liabilities
Long-term debt due within one year $ 62.5 $ 62.5
Notes payable 3.7 18.4
Rate refund provisions (Note 3) 115.6 67.8
Accounts payable 85.0 67.2
Accrued interest 63.9 60.6
Taxes payable 50.5 70.9
Other (Notes 3, 5 and 8) 522.0 564.4
-------- --------
Total 903.2 911.8
-------- --------
Deferred Liabilities and Credits
Deferred income tax (Note 4) 1,364.3 1,308.6
Deferred revenue - liquefied
natural gas project 73.5 78.1
Other (Notes 3 and 8) 959.5 1,040.7
-------- --------
Total 2,397.3 2,427.4
-------- --------
Long-term Debt 1,884.0 1,922.5
-------- --------
Commitments and Contingent Liabilities
(Notes 3, 4, 6, 8 and 9)
Common Stockholders' Equity
Common stock, 120.5 million (1994) and
120 million (1993) shares issued and
outstanding, $1 par value per share 120.5 120.0
Paid-in capital 2,052.6 2,040.4
Retained earnings (deficit) (437.7) (494.8)
-------- --------
Total (Note 7) 1,735.4 1,665.6
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,919.9 $6,927.3
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
Millions 1994 1993
- - -------- ------- --------
<S> <C> <C>
Operating Activities
Net income $ 107.7 $ 103.9
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 115.5 112.5
Deferred income tax expense 38.8 37.5
Net pension benefit (10.0) (7.9)
Other non-cash items in net income (22.8) 7.4
Net change in operating assets
and liabilities 52.3 52.1
------- -------
Net Cash Flows Provided by Operating Activities 281.5 305.5
------- -------
Investing Activities
Additions to plant, property and equipment (197.5) (107.7)
Net investment proceeds (purchases) (1.0) 3.7
Property sales, retirements and other 16.2 48.5
------- -------
Net Cash Flows Used in Investing Activities (182.3) (55.5)
------- -------
Financing Activities
Retirement of debt (50.0) (626.5)
Issuance of debt - 150.0
Net increase (decrease) in notes payable (14.7) 65.5
Common stock issuance 11.8 219.5
Dividends paid (50.6) (43.4)
Other - (7.2)
------- -------
Net Cash Flows Used in Financing Activities (103.5) (242.1)
------- -------
Net Change in Cash
Increase (decrease) in cash and cash equivalents (4.3) 7.9
Cash and cash equivalents, beginning of period 18.4 3.0
------- -------
Cash and Cash Equivalents, End of Period $ 14.1 $ 10.9
======= =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized)$ 95.3 $ 136.2
Cash paid for income tax 42.8 17.8
</TABLE>
See accompanying notes to consolidated financial statements
5<PAGE>
<PAGE>
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. References
Panhandle Eastern Corporation (PEC) and its subsidiaries (the Company)
are predominantly involved in the interstate transportation and storage
of natural gas. The interstate gas transmission operations of Texas
Eastern Transmission Corporation (TETCO), Algonquin Gas Transmission
Company (Algonquin), Panhandle Eastern Pipe Line Company (PEPL) and
Trunkline Gas Company (Trunkline), and the liquefied natural gas (LNG)
facilities of Trunkline LNG Company (Trunkline LNG), are subject to the
rules, regulations and accounting procedures of the Federal Energy
Regulatory Commission (FERC). Certain amounts for the prior periods
have been reclassified in the consolidated financial statements to
conform to the current presentation.
2. Accounting Policy Change
The Company adopted Statement of Financial Accounting Standards
(Accounting Standard) No. 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1994. This standard requires accruals
for benefits provided by the Company to certain former or inactive
employees. As a result of implementation of Accounting Standard
No. 112, the Company recorded additional liabilities and regulatory
assets of approximately $17 million. The Company's pipelines have
received permission from FERC to defer such costs, pending future rate
filings requesting recovery. The earnings impact of this change in
accounting policy is not significant.
3. Natural Gas Revenues and Regulatory Matters
When rate cases are pending final FERC approval, a portion of revenues
collected by each natural gas pipeline is subject to possible refunds.
The Company has established adequate reserves where required for such
cases. The following is a summary of pending rate cases before FERC and
related regulatory matters.
FERC Order 636
During the second and third quarters of 1993, the Company's interstate
natural gas pipelines began providing restructured services pursuant to
FERC Order 636.
This order, which is on appeal to the courts, requires pipeline service
restructuring that "unbundles" sales, transportation and storage
services. Order 636 provides for the use of the straight fixed-variable
(SFV) rate design, which assigns return on equity, related taxes and
other fixed costs to the demand component of rates. In addition,
Order 636 allows pipelines to recover eligible costs resulting from
implementation of the order (transition costs).
6<PAGE>
<PAGE>
On August 1, 1994, TETCO implemented a FERC-approved comprehensive
settlement that resolves issues related primarily to Order 636
transition costs and a number of other issues related to services prior
to Order 636.
At June 30, 1994 and December 31, 1993, the Company's pipelines had
recorded approximately $35 million and $320 million (1994), and
$25 million and $365 million (1993) of current and long-term regulatory
assets, respectively, representing transition costs incurred or
estimated to be incurred that will be recovered from customers. TETCO's
settlement provides for the recovery of transition costs through
volumetric and reservation charges through the year 2002. PEPL's and
Trunkline's transition cost recoveries, which are subject to certain
challenges that are pending further FERC action, will occur over the
next three years.
At June 30, 1994 and December 31, 1993, the Company had recorded
estimated current and long-term liabilities related to Order 636
transition costs of approximately $100 million and $220 million (1994),
and $100 million and $290 million (1993), respectively. In addition,
the Company had recorded current liabilities of approximately
$60 million at June 30, 1994 and December 31, 1993 for estimated refunds
pursuant to certain provisions of TETCO's settlement.
The Company believes the exposure associated with gas purchase contract
commitments and the significant reduction of the Company's merchant
services will be substantially mitigated by transition cost recoveries
pursuant to TETCO's settlement, Order 636 and other mechanisms,
including assignments of certain gas purchase contracts to third
parties. As a result, the Company believes that transition cost issues
related to Order 636 will not have a material adverse effect on future
consolidated results of operations or financial position.
Take-or-Pay
In the past, during the normal course of business, the Company's
pipelines entered into certain gas purchase contracts containing take-
or-pay provisions, which may expose the Company to financial risk.
Based on market and regulatory conditions, including Order 636
provisions that provide for the recovery of prudently incurred
transition costs, the Company believes such risk was not material to the
Company's consolidated results of operations or financial position as
of June 30, 1994.
PEPL and Trunkline are currently collecting certain take-or-pay
settlement costs through a combination of direct billings and volumetric
surcharges. The volumetric surcharges are being collected with interest
over a period extending through 1997. Comprehensive settlements that
resolve flow-through to customers of TETCO's pipeline suppliers'
take-or-pay were approved by FERC on August 4, 1994.
7<PAGE>
<PAGE>
The U.S. Department of the Interior has announced its intention to seek
additional royalties from gas producers as a result of payments received
by such producers in connection with past take-or-pay settlements,
buyouts and buydowns of gas sales contracts with natural gas pipelines.
The Company's pipelines, with respect to certain producer contract
settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. If the
pipelines ultimately have to reimburse or indemnify the producers, the
potential exists for some recovery from pipeline customers. The
potential liability of the producers to the government and of the
pipelines to the producers involves complex issues of law and fact which
are likely to take a substantial period of time to resolve. Management
believes this matter will not have a material adverse effect on the
Company's consolidated financial position.
Jurisdictional Transportation and Sales Rates
Algonquin - Algonquin filed a general rate increase effective
May 1, 1993, subject to refund, which reflected throughput changes due
to contract restructuring and a return to incremental rates with SFV
rate design. On July 8, 1994, FERC approved a comprehensive settlement
that resolves virtually all of Algonquin's regulatory issues with
respect to this rate case and Order 636 implementation, including the
recovery of transition costs.
PEPL - On April 1, 1992 and November 1, 1992, PEPL placed into effect,
subject to refund, general rate increases incorporating the SFV rate
design. Hearings in these rate proceedings were completed in the first
half of 1994, and a favorable initial decision by the FERC
Administrative Law Judge (ALJ) was received in the earlier rate case on
August 4, 1994. An initial ALJ decision is expected in the other
proceeding later in 1994.
Effective April 1, 1989, PEPL placed into effect, subject to refund,
sales and transportation rates reflecting a redesign of rates, including
seasonal rate structures. PEPL and others are appealing various FERC
orders related to these rates.
Other - The Company's pipelines, pursuant to FERC requirements,
requested FERC approval to record the impact of adopting Accounting
Standard No. 109, "Accounting for Income Taxes," including the
recognition of a portion of the impact as an increase to stockholders'
equity. FERC has denied approval of certain of these requests, pending
rate case review. The Company's pipelines have filed for rehearing.
The Company believes the ultimate resolution of this matter will not
have a material adverse effect on consolidated financial position.
4. Income Tax
The Company's investment tax credit (ITC) carryforward of $72.1 million
at December 31, 1993 will begin to expire in 1996 and will be
extinguished in 2002 if not utilized sooner. The alternative minimum
tax credit carryforward of $57.3 million at December 31, 1993 can be
carried forward indefinitely.
8<PAGE>
<PAGE>
In 1990, the Internal Revenue Service (IRS) issued regulations which
disallow for tax purposes losses incurred in the Company's 1989 sales
of certain Texas Eastern Corporation (TEC) assets. Although the IRS has
not issued a final determination of the Company's 1989 tax liability,
the Company has deferred tax liabilities in the consolidated balance
sheet which are adequate to cover any tax liability related to this and
other audit issues.
5. Gas Imbalances
The consolidated balance sheet includes in-kind balances as a result of
differences in gas volumes received and delivered. At June 30, 1994 and
December 31, 1993, other current assets and other current liabilities
included $23.6 million and $17.7 million (1994), and $64.8 million and
$67.9 million (1993), respectively, for these imbalances.
6. Other Contingencies
TEPPCO Partners, L.P. - TEPPCO Partners, L.P. is a master limited
partnership (MLP) that owns and operates a petroleum products pipeline.
The Company has a 10.45% ownership interest in the MLP. Prior to
April 1, 1994, 8.45% of the Company's ownership interest was
nonparticipating in allocations of income/loss, and cash distributions.
To support the MLP's ability to make the minimum quarterly distributions
on all MLP units, PEC has agreed, under certain circumstances and
subject to certain limitations, to contribute cash to the MLP in return
for additional limited partner interests (APIs). Subject to certain
exceptions, the support period will extend through December 31, 1994.
PEC's obligation to purchase APIs is limited to an aggregate of
$50 million (maximum outstanding at any time) during this support
period. No API purchases have been required since inception through the
date of this report. Furthermore, a subsidiary partnership of the MLP
has $356.5 million in First Mortgage Notes outstanding with recourse to
the general partner, a subsidiary of TEC. These notes have annual
principal payments due through 2010.
Petrolane Incorporated (Petrolane) - In connection with the sale of
Petrolane in 1989, TEC agreed to indemnify Petrolane against certain
obligations for guaranteed leases and environmental matters. Certain
of the lease obligations relate to Petrolane's divestiture of
supermarket operations prior to its acquisition by TEC and, as of
December 31, 1993, totaled approximately $95.7 million over the
remaining terms of the leases, which expire in 2006. In the opinion of
management, the probability that TEC will be required to perform under
this indemnity provision is remote.
9<PAGE>
<PAGE>
Petrolane was named in a suit filed by the city of Fresno, California
(the City) in the U.S. District Court for the Eastern District of
California on February 18, 1993 seeking contribution from 22 parties for
characterization and remediation costs related to the Fresno Sanitary
Landfill (the Landfill). The City, under a mandate from the U.S.
Environmental Protection Agency (EPA), is obligated to characterize and
remediate environmental contamination at the Landfill, which is on the
National Priorities List. One of Petrolane's former subsidiaries is
alleged to have disposed of hazardous substances at the Landfill. Since
characterization of the Landfill has not been completed, the Company is
unable at this time to estimate its share of cleanup costs or the timing
of such costs, but expects that this matter will not have a material
adverse effect on the Company's consolidated financial position.
Northern Border Pipeline Company (Northern Border) - Under the terms of
a settlement related to a transportation agreement between PEPL and
Northern Border, PEPL guarantees payment to Northern Border under a
transportation agreement by an affiliate of Pan-Alberta Gas Limited.
The transportation agreement requires estimated total payments of
$212.8 million for the years 1994 through 2001. In the opinion of
management, the probability that performance will be required under this
guarantee is remote.
7. Stockholders' Equity
Under the most restrictive covenants contained in the Company's debt
agreements, $736.1 million of PEC's common stockholders' equity was
available for the payment of dividends at June 30, 1994.
8. Environmental Matters
TETCO - TETCO is currently conducting a PCB (polychlorinated biphenyl)
characterization and cleanup program at certain of its compressor
station sites under conditions stipulated by a U.S. Consent Decree. The
program includes on- and off-site characterization, installation of on-
site source control equipment and groundwater monitoring wells, and on-
site cleanup work. TETCO expects to complete the program at up to
89 sites in as many as 14 states over an approximate 10-year period that
began in 1990. TETCO also has ongoing cleanup and remediation programs
in Pennsylvania and New Jersey, implemented pursuant to settlement
agreements with those states. In 1991, TETCO entered into an Interim
Agreed Order with the state of Kentucky concerning characterization of
TETCO's three compressor station sites in that state and TETCO has
substantially completed work under the Interim Agreed Order. The
Company is negotiating an Agreed Order with the state of Kentucky for
remediation of those sites and is currently remediating one of those
sites. The state of Kentucky is currently considering the imposition
of a fine. The Company previously established a reserve for potential
fines and penalties. Additionally, under a consent order with the state
of Mississippi, TETCO is conducting site assessment and characterization
in that state. The cleanup programs are not expected to interrupt or
diminish TETCO's operational ability to deliver natural gas to
customers.
10<PAGE>
<PAGE>
At June 30, 1994 and December 31, 1993, TETCO had recorded current and
long-term liabilities of $82.5 million and $302.2 million (1994), and
$93 million and $298.7 million (1993), respectively, for remaining
estimated cleanup costs. These cost estimates represent gross cleanup
costs expected to be incurred by TETCO, have not been reduced by
customer or insurance recoveries and do not include fines, penalties or
third-party claims. TETCO is recovering 57.5% of cleanup costs in rates
pursuant to a stipulation and agreement approved by FERC in 1992. At
June 30, 1994 and December 31, 1993, TETCO had recorded current and
long-term regulatory assets of $30.5 million and $181.2 million (1994),
and $31.1 million and $196.3 million (1993), respectively, representing
costs to be recovered from customers.
TETCO's litigation with its insurance carriers to recover cleanup and
other costs and to enforce the carriers' duty to defend and indemnify
TETCO is continuing. On January 10, 1994, the Court of Appeals for the
Third Circuit, on rehearing, affirmed the lower court's summary judgment
rulings in favor of the insurance carriers. TETCO's petition for
rehearing en banc was denied by the Court on February 3, 1994. TETCO
filed a petition for a writ of certiorari with the U.S. Supreme Court
on June 24, 1994.
TETCO, as well as certain other PEC subsidiaries in some of the cases,
are defendants in several private plaintiff suits in various courts.
These suits seek relief for actual and punitive damages that allegedly
resulted from the release of PCBs and other hazardous substances in
violation of federal and state laws. The Company is continuing to
defend itself vigorously in these suits.
The Company believes the ultimate resolution of these matters relating
to the PCB cleanup programs will not have a material adverse effect on
consolidated results of operations or financial position.
PEPL and Trunkline - The Company has notified the EPA of PCB
contamination at up to 41 sites on the PEPL and Trunkline systems, and
is undertaking a remediation program at these sites, while continuing
to discuss with and provide information to the EPA on these matters.
Localized contamination of these sites resulted from the past use of
lubricants containing PCBs in auxiliary equipment. Soil and sediment
testing, to date, has detected no significant off-site contamination.
The Company is also involved in the cleanup and removal of wastewater
collection facilities at 14 PEPL and Trunkline sites. The PCB and
wastewater cleanup programs are expected to extend over a 10-year period
that began in 1992. In addition to these ongoing assessments, PEPL and
Trunkline are evaluating the prior use of disposal areas to determine
if those areas potentially contain hazardous substances. The Company
is unable at this time to estimate remediation costs that will result
from these evaluations.
11<PAGE>
<PAGE>
The Company has recorded $33 million for liabilities relating to PEPL
and Trunkline existing cleanup programs and has recorded regulatory
assets for the same amount, representing costs to be recovered from
customers. The Company does not expect the resolution of the PEPL and
Trunkline environmental matters to have a material adverse effect on
consolidated financial position.
9. Litigation
In connection with a rupture and fire that occurred on TETCO's 36-inch
natural gas pipeline on March 23, 1994 in Edison, New Jersey, numerous
lawsuits have been filed to date against the Company and other
defendants in the Superior Court of New Jersey, Middlesex County, on
behalf of hundreds of individuals seeking unspecified compensatory
damages for personal injuries and property losses, as well as punitive
damages. The Court has ordered a moratorium on the filing of new suits
through September 1994. Requests by some plaintiffs for class action
certification have been denied by the Court and certain plaintiffs have
appealed the denial. The cases are expected to be consolidated for
trial on the issue of liability. The Company has also received numerous
letters from attorneys claiming to represent, in total, over
800 individuals with unspecified claims against the Company. In
addition, Quality Materials, Inc., the owner of the asphalt plant
located at the site of the rupture, has filed suit in the U.S. District
Court for the District of New Jersey against TETCO seeking to recover
unspecified property damages, lost income and punitive damages. TETCO
has filed a counterclaim against Quality Materials, Inc.
The cause of the rupture is under investigation by the National
Transportation Safety Board. The Company has recorded a $5 million
after-tax charge for costs related to this incident that are not
recoverable under the Company's insurance policies. The Company does
not expect the resolution of these matters to have a material adverse
effect on consolidated results of operations or financial position.
The Company is also involved in various other legal actions and claims
arising in the normal course of business. Based upon its current
assessment of the facts and the law, management does not believe that
the outcome of any such action or claim will have a material adverse
effect upon the consolidated financial position of the Company.
However, these actions and claims in the aggregate seek substantial
damages against the Company and are subject to the uncertainties
inherent in any litigation.
10. Fair Presentation
The information as furnished reflects all normal recurring adjustments
that are, in the opinion of management, necessary for a fair
presentation of financial position as of June 30, 1994, results of
operations for the three and six months ended June 30, 1994 and 1993,
and cash flows for the six months ended June 30, 1994 and 1993.
12<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information is provided to facilitate increased understanding
of the 1994 and 1993 interim consolidated financial statements and
accompanying notes presented in Item 1. The discussion of the Company's
"Operating Environment and Outlook" addresses key trends and future plans.
The "Capital Resources, Liquidity and Financial Position" section analyzes
cash flows and financial position. Material period-to-period variances in the
consolidated statement of income are discussed under "Results of Operations."
Throughout these discussions, management has addressed items that are
reasonably likely to materially affect future liquidity or earnings.
OPERATING ENVIRONMENT AND OUTLOOK
As discussed in Note 3 of the Notes to Consolidated Financial Statements, all
four of the Company's interstate pipelines implemented restructured services
in the second and third quarters of 1993 pursuant to FERC Order 636.
On August 1, 1994, TETCO implemented a FERC-approved comprehensive settlement
that resolves issues related primarily to Order 636 transition costs and a
number of other issues related to services prior to Order 636. This
settlement and other Order 636 transition issues are further discussed under
"Operating Cash Flow."
As a result of the SFV rate design required by Order 636 and the elimination
by PEPL of seasonal rates, historical seasonal variations in revenues and
receivables have diminished. Generally, pipeline earnings have become more
evenly distributed throughout the year.
Transportation and storage services form the core of the Company's business
in the Order 636 environment. Trunkline, however, continues to offer
unbundled sales service that will end in late 1994. Upon implementation of
Order 636, operating revenues and gas purchase costs decreased primarily as
a result of the elimination of natural gas sales by TETCO, Algonquin and PEPL,
while operating income generated by firm transportation and storage services
increased. Earnings from interruptible transportation revenues have been
significantly reduced as a result of Order 636 rate design changes and
capacity release mechanisms that allow firm customers to sell unused customer
capacity. The Company's pipelines continue to offer selective discounting to
utilize available capacity.
The Company expects to benefit from the environment created by the regulatory
changes of Order 636 by developing innovative services for customers and also
plans to continue expanding the natural gas pipeline network via major capital
projects. Natural gas storage, gathering and marketing are among the areas
of opportunity the Company is examining for potential growth. The Company's
four interstate pipelines and the Market and Supply Services group, which
includes 1 Source Corporation and Centana Energy Corporation, are involved in
responding to new markets created, in part, by Order 636, and to increased
demand for natural gas as both a sound economic and environmental solution to
the nation's energy needs. See further discussion in "Investing Cash Flow."
13<PAGE>
<PAGE>
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL POSITION
Operating Cash Flow
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------------------
Millions 1994 1993
- - -------- ------ ------
<S> <C> <C>
Net Cash Flows Provided by
Operating Activities $281.5 $305.5
------ ------
</TABLE>
Historical Analysis - Operating cash flows decreased $24 million comparing the
six-month period in 1994 to the same period in 1993. This decrease reflects
lower operating cash activity caused by the elimination of sales services and
the sale of LNG project settlement receivables during the 1993 period,
partially offset by 1994 collections of purchased gas costs incurred in prior
years and lower interest costs comparing the two periods.
Order 636 Transition Costs - With implementation of Order 636 and the
significant reduction in merchant services that has resulted, the Company is
incurring certain costs for the transition, primarily related to TETCO's gas
purchase contract commitments. TETCO, Algonquin and PEPL no longer offer
merchant sales of natural gas, thereby substantially eliminating the need for
gas purchase contracts. Trunkline's gas purchase commitments primarily relate
to unbundled sales contracts that will end in late 1994. At June 30, 1994,
the Company's gross commitments under gas purchase contracts that do not
contain market-sensitive pricing provisions were approximately $245 million,
$150 million, $95 million, $55 million and $35 million for the years 1994
through 1998, respectively, and a total of $20 million thereafter. These
estimates reflect significant assumptions regarding deliverability and
escalation clauses.
TETCO's Order 636 settlement provides for the recovery of transition costs,
including interest, through volumetric and reservation charges through the
year 2002. PEPL's and Trunkline's recoveries, which are subject to further
FERC action, will occur over the next three years. For the remainder of 1994
and during the following one to two years, above-market gas purchase contract
payments by the pipelines are expected to exceed transition cost collections
from customers. Cash requirements related to transition costs will be funded
by cash from operations and/or available credit facilities and are not
expected to have a material adverse effect on liquidity. Net cash receipts
related to transition costs are expected to occur in periods beyond 1995 or
1996.
14<PAGE>
<PAGE>
The Company believes the exposure associated with gas purchase contract
commitments and the significant reduction of the Company's merchant services
will be substantially mitigated by transition cost recovery pursuant to
TETCO's settlement, Order 636 and other mechanisms, including assignments of
certain gas purchase contracts to third parties. As a result, the Company
believes that transition cost issues related to Order 636 will not have a
material adverse effect on consolidated financial position.
Environmental Matters - The Company believes it will be able to fund the
TETCO, PEPL and Trunkline PCB and other existing cleanup program costs from
customer recoveries and other cash flows and, therefore, the ultimate
resolution of these matters will not have a material adverse effect on
consolidated financial position or liquidity. See Note 8 of the Notes to
Consolidated Financial Statements. In addition, PEPL and Trunkline are
evaluating the prior use of disposal areas to determine if those areas
potentially contain hazardous substances. The Company is unable at this time
to estimate remediation costs that will result from these evaluations. As
discussed in Note 6 of the Notes to Consolidated Financial Statements, the
Company is also unable at this time to estimate its share or the timing of
cleanup costs related to the Fresno Sanitary Landfill, but expects that this
matter will not have a material adverse effect on the Company's consolidated
financial position or liquidity.
Litigation - In connection with a rupture and fire that occurred on TETCO's
36-inch natural gas pipeline on March 23, 1994 in Edison, New Jersey, numerous
lawsuits have been filed to date against the Company and other defendants in
the Superior Court of New Jersey, Middlesex County, on behalf of hundreds of
individuals seeking unspecified compensatory damages for personal injuries and
property losses, as well as punitive damages. The Court has ordered a
moratorium on the filing of new suits through September 1994. Requests by
some plaintiffs for class action certification have been denied by the Court
and certain plaintiffs have appealed the denial. The cases are expected to
be consolidated for trial on the issue of liability. The Company has also
received numerous letters from attorneys claiming to represent, in total, over
800 individuals with unspecified claims against the Company. In addition,
Quality Materials, Inc., the owner of the asphalt plant located at the site
of the rupture, has filed suit in the U.S. District Court for the District of
New Jersey against TETCO seeking to recover unspecified property damages, lost
income and punitive damages. TETCO has filed a counterclaim against Quality
Materials, Inc.
The cause of the rupture is under investigation by the National Transportation
Safety Board. The Company has recorded a $5 million after-tax charge for
costs related to this incident that are not recoverable under the Company's
insurance policies. The Company does not expect the resolution of these
matters to have a material adverse effect on consolidated financial position
or liquidity.
Other - The Company expects to generate sufficient future taxable income from
operations to fully utilize deferred tax assets, net of valuation allowance,
including the ITC carryforward. However, if needed, the Company could
implement tax-planning strategies to accelerate approximately $300 million of
taxable income, prior to expiration of the carryforward.
15<PAGE>
<PAGE>
See Notes 3 and 5 of the Notes to Consolidated Financial Statements for a
discussion of other regulatory proceedings and gas imbalances.
On March 1, 1994, Trunkline filed a general rate increase in accordance with
terms of a rate case settlement in 1993. FERC accepted and suspended this
rate filing to become effective September 1, 1994, subject to refund, and set
the rate case for hearing to begin in June 1995.
Other operating cash requirements for the next 12 months are expected to
include rate refunds. These and any other operating requirements are expected
to be funded by cash from operations, debt issuances and/or available credit
facilities. The Company continues to make periodic sales of trade
receivables, with limited recourse.
Investing Cash Flow
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------
Millions 1994 1993
- - -------- ------ -----
<S> <C> <C>
Net Cash Flows Used in Investing Activities $182.3 $55.5
------ -----
</TABLE>
Capital Expenditures - Capital expenditures totaled $197.5 million in the
first six months of 1994, compared with $107.7 million for the same period in
1993. Capital expenditures for 1994 are expected to approximate $525 million
and be funded by cash from operations, debt issuances and/or available credit
facilities. These capital expenditures include significant amounts for TETCO
and Algonquin customer-supported market expansion projects.
Capital expenditures for 1994 also reflect completion by the Company on
June 1, 1994 of the purchase of certain intrastate natural gas pipeline,
storage and processing facilities in Texas for more than $100 million.
Additional related purchases are expected to be completed during the next
12 months. These transactions will enable the Company to provide expanded
services for natural gas producers and other customers in the Gulf Coast
region.
Liberty Pipeline Company (Liberty), in which a TETCO subsidiary owns a 30%
interest, has postponed indefinitely the proposed $162 million Liberty
pipeline as a result of two customers withdrawing from the project. TETCO's
planned expansion to deliver natural gas to Liberty also has been postponed
pending redefinition of the project. No material amounts for the Liberty
pipeline have been expended by the Company to date.
16<PAGE>
<PAGE>
The Company continues to study the potential impact of the Clean Air Act
Amendments of 1990 (the Amendments) and the related federal and state
regulations on the Company. While many of the regulations have not yet been
finalized, the Company currently estimates that capital expenditures ranging
from $60 million to $80 million may be necessary to comply with the
requirements of the Amendments and the regulations. The Company's estimated
1994 capital expenditures include approximately $15 million related to these
requirements. Management believes any expenditures necessary will be eligible
for recovery in rates.
Financing Cash Flow
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------
Millions 1994 1993
- - -------- ------ ------
<S> <C> <C>
Net Cash Flows Used in Financing Activities $103.5 $242.1
------ ------
</TABLE>
Cash flows used in financing activities decreased $138.6 million comparing the
first half of 1994 to the same period of 1993. During the six months ended
June 30, 1993, significant debt retirements were made, including early
redemptions of long-term debt and retirement of amounts outstanding under the
revolving credit agreements. These debt payments were partially offset by
proceeds from a 10-million-share common stock offering during the 1993 period.
Debt and Credit Facilities - TETCO and PEPL have variable-rate, revolving
credit agreements that permit these subsidiaries to borrow up to $700 million
on a combined basis, utilizing revolving credit borrowings and letter of
credit facilities. At June 30, 1994, there were no amounts outstanding under
these agreements.
Financing Requirements - Dividends and debt repayments for the next 12 months,
along with operating and investing requirements, are expected to be funded by
cash from operations, debt issuances and/or available credit facilities.
TETCO and PEPL have effective shelf registration statements with the
Securities and Exchange Commission for the issuance of $200 million each of
unsecured debt securities.
RESULTS OF OPERATIONS
Consolidated net income for the six months ended June 30, 1994 was
$107.7 million, or $0.90 per share on 120.3 million average common shares
outstanding, compared with $103.9 million, or $0.94 per share on 110.4 million
average common shares outstanding, for the same period in 1993.
17<PAGE>
<PAGE>
Operating Income Analysis
While gas transmission operations are seasonal, with the highest throughput
occurring during the first and fourth quarters, the historical seasonal
variances in financial results began to diminish in the second quarter of 1993
as a result of the SFV rate design required by Order 636 and the termination
of seasonal rates by PEPL.
Consolidated operating income decreased $21.4 million, or 7%, in the first six
months of 1994 compared with the same period in 1993. These results primarily
reflect the pipelines' rate designs mandated by FERC Order 636, which more
evenly distribute earnings throughout the year and significantly reduce the
earnings benefit from interruptible transportation revenues. Reduced margins
on natural gas liquids sales by Centana also contributed to the decrease in
consolidated operating income.
Total natural gas volumes were up 8% comparing these same periods, due to an
exceptionally cold winter in the market areas in the first quarter of 1994 and
incremental services initiated by TETCO and Algonquin subsequent to the 1993
second quarter. With implementation of the SFV rate design, which assigns
return on equity, related taxes and other fixed costs to the demand component
of rates, earnings fluctuations related to throughput volumes have been
minimized.
Consolidated Operating Income by Business Group
<TABLE>
<CAPTION>
Six Months Ended June 30
---------------------------
Millions 1994 1993 % Change
-------- ------ ------ --------
<S> <C> <C> <C>
Gas Transmission
TETCO $124.2 $147.4 (16)
Algonquin 37.9 30.0 26
PEPL 75.7 70.7 7
Trunkline 25.9 30.8 (16)
Other 2.7 3.0 (10)
------ ------ ----
Total 266.4 281.9 (5)
Market and Supply Services 8.9 16.3 (45)
LNG Project 1.3 (0.1) -
Parent, Other and Eliminations 3.2 3.1 3
------ ------ ----
Consolidated Operating Income $279.8 $301.2 (7)
====== ====== ====
</TABLE>
18<PAGE>
<PAGE>
Natural Gas Pipeline Volumes
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------
Billion cubic feet (Bcf) 1994 1993(A) % Change
------------------------ ------ ------- --------
<S> <C> <C> <C>
Market-area Transports
TETCO 567 458 24
Algonquin 145 130 12
PEPL 324 285 14
Trunkline 243 198 23
Eliminations (46) (66) (30)
----- ----- ----
1,233 1,005 23
----- ----- ----
Sales
TETCO - 33 (100)
Algonquin - 2 (100)
PEPL - 22 (100)
Trunkline -(B) 50 (100)
----- ----- ----
- 107 (100)
----- ----- ----
Total Market Area 1,233 1,112 11
----- ----- ----
Supply-area Transports
TETCO 68 56 21
PEPL 21 31 (32)
Trunkline 57 75 (24)
Eliminations - (1) (100)
----- ----- ----
146 161 (9)
----- ----- ----
Total Volumes 1,379 1,273 8
===== ===== ====
----------
(A) Certain volumes for the prior period have been restated to conform
to the current reporting presentation.
(B) Excludes 58 Bcf which was both sold and transported, and is
included in transportation throughput.
</TABLE>
19<PAGE>
<PAGE>
TETCO - Operating income for TETCO decreased $23.2 million comparing the first
six months of 1994 with the same period in 1993 primarily due to reduced
interruptible transportation revenues. Net sales revenue decreased
$129.6 million, reflecting the elimination of TETCO's traditional merchant
function effective June 1, 1993. Transportation revenue increased
$117 million, or 50%, as volumes increased 24%, reflecting the SFV rate design
and the conversion of sales contracts to firm transportation. Other revenues
decreased primarily from the conversion of a portion of storage revenues to
transportation revenues following the unbundling of services pursuant to
Order 636.
Algonquin - Algonquin's operating income remained fairly constant in the first
six months of 1994 compared with the same period in 1993, excluding an
$8 million benefit recorded in the second quarter of 1994 for the settlement
of certain rate cases. Transportation revenue increased $18.1 million,
partially offsetting declines in net sales and storage revenues. The
decreases in net sales and storage revenues reflect the elimination of
Algonquin's traditional merchant function and the conversion of storage
revenues to transportation revenues upon implementation of Order 636.
PEPL - This pipeline's operating income increased $5 million comparing the
first six months of 1994 and 1993. PEPL's operating income benefited in the
second quarter of 1994 from increased firm transportation contracts and
reduced expenses. This improvement offset the first quarter decrease that
resulted from the elimination of seasonal rates that were in effect prior to
PEPL's implementation of Order 636 on May 1, 1993. Increased revenues from
unbundled transportation and storage services partially offset reduced net
sales revenues resulting from the elimination of PEPL's merchant function.
Operating expenses decreased as a result of lower expenses related to sales
volumes, as well as the release in 1994 of $10.6 million in provisions
established for gas supply matters that have been resolved.
Trunkline - Operating income for Trunkline decreased $4.9 million comparing
the first six months of 1994 with the same period in 1993. Net sales revenue
continued to decrease while transportation revenue increased as a result of
unbundled rates. Sales revenue also declined as a result of a $15.5 million
rate case benefit recorded in the second quarter of 1993. Trunkline's
unbundled sales service will end in late 1994. Operating expenses decreased
primarily as a result of a $13 million charge recorded in the second quarter
of 1993 related to the estimated cost of gas purchase contracts.
Other Operating Income - Operating income for Market and Supply Services
decreased $7.4 million comparing the first six months of 1994 and 1993. This
decrease is primarily attributable to the lower sales prices of natural gas
liquids in 1994, partially offset by revenues from new services provided by
1 Source Corporation.
Other Income and Deductions - Other income and deductions decreased
$3.9 million for the first six months of 1994 compared with the same period
in 1993. This decrease primarily reflects interest income earned in 1993 on
the LNG project settlement receivables prior to the sale of these receivables
in the second and third quarters of 1993. Equity in earnings from investments
in affiliates increased as a result of improvements, primarily by National
Methanol Company, partially offset by a decrease resulting from the sale of
a portion of the Company's interest in Northern Border Partners, L.P. in late
1993.
20<PAGE>
<PAGE>
Interest Expense - Interest expense in the first six months of 1994 decreased
$36.4 million, or 25%, compared to the same period in 1993. This reduction
reflects reduced average debt balances outstanding during the first six months
of 1994 compared with the same period in 1993, primarily resulting from the
Company's early retirement of four issues of relatively high-interest debt in
the last nine months of 1993. Also contributing to the decrease was interest
in 1993 on refunds of production-related costs.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 3, 6, 8 and 9 of the Notes to Consolidated Financial Statements in
Part I of this Report which are incorporated herein by reference. See also
Item 3 of PEC's Annual Report on Form 10-K for the year ended December 31,
1993.
Item 4. Submission of Matters to a Vote of Security Holders
The 1994 Annual Meeting of Stockholders of PEC was held on April 27, 1994.
There were two matters submitted to a vote of stockholders. The first was the
election of four directors for three-year terms expiring at the 1997 Annual
Meeting. As a result of voting by stockholders present in person or by proxy,
103,414,592 shares of common stock were cast in favor of Paul M. Anderson and
1,568,599 shares were withheld. With respect to William T. Esrey,
103,414,587 shares were cast in favor, and 1,568,605 were withheld. Ann
Maynard Gray received 103,335,584 shares in favor and 1,647,608 were withheld.
George L. Mazanec received 103,418,107 shares in favor, with 1,565,085 shares
withheld.
The second matter was a vote on approval of the Panhandle Eastern Corporation
1994 Long Term Incentive Plan. Stockholders present in person or by proxy
voted 84,833,411 shares in favor thereof and 18,913,458 against. There were
1,237,473 shares abstaining.
21<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned duly authorized officer and chief accounting officer.
PANHANDLE EASTERN CORPORATION
(Registrant)
/s/ Sandra P. Meyer
---------------------------------------
Sandra P. Meyer, Controller
Date: August 12, 1994
22
